Rich pickings for chosen few

The group of borrowers able to access
the Japanese investor base is traditionally an exclusive club. Only
the highest rated issuers, and those with a long track record in
the market, stand to benefit
from the deep sub-Libor funding that structured trades targeted at
Japan can offer.

ISSUERS TARGETING JAPAN often have a long association with the
country, and historically it has been tough for new issuers to
break into this key investor base.

But if an issuer is well known, and well liked, Japanese
investors tend to be willing to pay a premium for its paper.
However, it tends to be only the highest rated issuers that can
achieve these levels.

There remain many - particularly higher rated - issuers whose
investor base for MTNs is chiefly from Japan. In the most part,
they sell their securities in the form of structured deals.

"We have never been so active in the structured MTN market as
now," says Per Åkerlind, treasurer at Swedish Export Credit (SEK).
The Swedish agency has borrowed $3.2bn overall in 1999, around
$2.8bn of which has been off the Eu15bn MTN programme which SEK
uses as its principal documentation shelf.

Åkerlind estimates that at least 75% of this year's borrowing
has been structured, and that about three-quarters of its
structured borrowing has been sold to Japanese institutional and
retail investors.

For SEK, the most popular form of debt requested by
institutional investors have been Bermudan callable power reverse
dual currency notes. Japanese investors have a long-standing link
with Nordic issuers - SEK's relationship with the Japanese market,
for example, goes back two decades.

So what accounts for the demand for SEK's paper? Åkerlind
explains that it is a result of the fact that "we have proven
consistent in what we are doing. Profits have been even year on
year, there have been no surprises and we are extremely risk
averse. This allows us to get long term financing from Japan."

SEK is rated Aa1 by Moody's and AA+ by Standard & Poor's for
its foreign currency borrowing.

Because Åkerlind sees large, liquid benchmark transactions as
the "name of the game" for the European investor base, Japan has
becomes relatively more attractive for an issuer such as SEK. "It
is not cost efficient for us to issue the larger transactions at
the moment," he says.

The European investor base has not always been the chosen port
of call for Toyota Motor Credit Corp. "We haven't seen much
investor demand from the European market - in fact, most of our
trades are reverse enquiry from Japanese investors," says Jean
Liao, funding manager at TMCC.

It is not a situation that Liao is necessarily comfortable with.
"While Japan is a good source of investors, our objective is to
broaden that base and look to Europe," she says.

That may be tough, as Liao concedes that AAA/Aa1 rated TMCC does
have the problem that "our targets are on the aggressive side.

In Europe investors are moving down the curve and looking at
lesser-rated and higher yielding issuers."

TMCC has an international borrowing requirement of approximately
$7bn a year. Most of its Euro-MTNs are privately placed deals.

"We have a Euro-MTN programme from which Eurobonds can be
documented, but we don't consider public placements to be
Euro-MTNs," says Liao.

As TMCC places what it considers to be MTNs on the basis of
reverse enquiry, it is difficult to tell what percentage of its
total borrowing requirement will be sold under that format.

As an indication, the Euro-MTN shelf has a potential to reach
$16bn, although outstandings are currently around $11bn. But a
large proportion of this shelf is made up of public deals.

Last year, TMCC sold $550m in Euro-MTNs and $3.4bn in Eurobonds.
It also has a US shelf from which it issues domestic (US) MTNs and
global bonds.

For TMCC, structured transactions are generally designed to
enhance yield for investors. "The majority of our MTNs are callable
transactions, step-up reverse floaters or reverse dual currency
transactions," says Liao.

TMCC does not sell dual currency transactions as it has 50%
principal protection as an internal requirement. Liao does not see
as much demand for reverse dual currency deals as she does for
other callable deals.

TMCC's favoured format is 10 year deals callable after one year,
which have a high chance of being called. "The demand is more from
small institutions," says Liao. "From their perspective they are
getting a higher yield than issuing plain vanilla one year
bonds."

DNIB is another issuer that sells a high proportion of its MTNS
to Japan. For Japanese investors, 90% of DNIB's issuance will be
structured, but the type of structure "depends on the flavour of
the month," says Nicolette Kroon, funding and investor relations
manager at DNIB.

"This year it has been reverse floaters and foreign exchange
linked dual currency issues, last year it was power reverse dual
currency bonds," she says.

Canada also has a long-standing relationship with Japanese
investors. "Canada had been relying on its Canada Bills and Canada
Notes (primarily US domestic targeted) programmes along with global
dollar issues until they introduced their Euro-MTN programme to tap
international demand," says Philip Pratt of the capital markets
desk at Nomura.

"We completed a ¥50bn issue for Canada earlier this year which
was driven through their asset/liability programme to provide for
yen reserves. Canada does not borrow for domestic purposes in the
international markets, using foreign markets for foreign exchange
account purposes." However, Canada has been out of the market over
the past nine months as its needs have been relatively small and
its funding targets have been relatively tight. Some $3bn was
outstanding on its $10bn Euro-MTN programme at the end of
August.

EVEN FOR FREQUENT borrowers, keeping contact with investors is
important - issuers that are in the market for the long haul need
to maintain a constant dialogue.

SEK has tried to keep investors happy through offering to buy
back bonds when necessary. "We have been buying back bonds, but
it's much less now than in the past," says Akerlind.

"Several years ago there was a fall back in the value of the yen
after its peak in 1996/97. We saw a certain recycling going on as
investors went in and out of the bonds, but it was not because
those investors were in trouble,"

Åkerlind says the crucial factor to maintaining access to
Japanese investors is to support deals. "If you don't, you won't
get the business in the first place," he says.